Legal
Steven J. Newman, Esq.
A Guide to Terminating Failed
or Struggling Single-Site Projects
O
lder timeshare projects that were
created prior to the entrance of the
brands into the timeshare industry may
struggle or fail for a number of reasons,
including the project falling into disrepair
or the original developer failing to properly
market and sell interests in the project.
Many times, an enterprising new developer
may attempt to take over the project or a
lender may foreclose on the project and
become a successor developer. In these
situations, the new/successor developer
(referred to as the “Developer”) may
decide that the best course of action is to
terminate the project, buy out all of the
existing timeshare owners, and start over.
Terminating a timeshare project,
cult, particularly
when there is the issue of hundreds if not
thousands of existing timeshare owners
that the Developer must handle. Some of
these owners the Developer may not be
able to locate, others may not be responsive
to the Developer, and still others may
refuse to sell their timeshare interests back
to the Developer—even though the project
is struggling or has failed. When the
Developer terminates a timeshare project,
the Developer’s objective is to purchase
all of the timeshare interests at the project
and obtain insurable title to such interests.
Here is a summary of the steps necessary
to terminate a failed or struggling single
site timeshare project.
Step 1: Obtaining Control of the
Association—Reviewing State Law
and Governing Documents to Determine
Whether Termination is Feasible.
A Developer wishing to terminate a
rst look at state
law and the governing documents of the
timeshare regime to determine whether
cient
number of timeshare interests that will
enable the Developer to: (1) unilaterally
amend the project documents, if necessary,
to include the termination language
28
discussed in Step 3 below; and (2) control
enough votes to unilaterally terminate
the timeshare regime. The key provisions
to review are the amendment and
termination requirements in the timeshare
declaration, as well as the state’s nont corporation act, timeshare act, and,
if applicable, condominium or common
1
interest ownership acts.
If the voting requirements (under
state law and the project documents) for
termination and/or amendment require
100% of the total votes of the owners
association, then it will not be feasible
for the Developer to obtain control of
the owners association. If such voting
requirements are only at 70% or 80%,
then it is more likely that the Developer
can gain control of the owners association
and terminate the project.
Step 2: Obtaining Control of the
Association: Buy-Back Program.
If a Developer determines that
it is feasible to obtain enough votes to
terminate a timeshare regime, then it must
launch a buy-back program. This program
may be as simple as offering to pay
existing owners an amount that is higher
than the current value of their timeshare
interest, which often has a depressed value.
However, some Developers have offered
additional incentives, such as offering
“trades” into ownership in a multi-site
ts
at a lower annual cost. Under such an
incentive program, owners are required
to “quitclaim” their timeshare to the
Developer and to release the Developer
from all liability. The owners are then
cate in the new
program. No additional costs are charged
to the owners under this approach.
Step 3: Amending the Declaration to
Clearly Address Termination.
Once the Developer has obtained the
requisite number of votes to terminate the
project and amend the project documents,
the Developer will most likely need to
amend the termination provisions in the
timeshare declaration because, in many
instances, the timeshare declaration and
state law do not thoroughly address how
a project is terminated and what happens
after termination.
This amendment should include the
following provisions: (1) upon termination,
title to the timeshare interests shall vest
in the owners association as trustee for
t of its members; (2) the owners
association shall have the authority to
terminate the project documents and
sell the entire property, usually to the
Developer; (3) each remaining timeshare
owner shall be paid an amount equal to the
fair market value of the timeshare interests
as of the date of termination of the
timeshare program; and (4) a “Termination
Agreement” shall be recorded terminating
the timeshare regime and setting forth
the minimum terms of the sale of the
timeshare interests.
Step 4: Appraisal and Determination of
Purchase Price.
The purchase price for the timeshare
interests should equal the fair market
value of the timeshare interests as of the
date of termination of the timeshare
program. Unless otherwise required by
state law, the purchase price does not need
to be based on the current market value
of the property and building(s) in which
the timeshare project is located. This is a
critical distinction. The Developer should
obtain an appraisal from someone who is
experienced in appraising timeshares and
fully understands this distinction. This
appraisal may also be used in the quiet title
action discussed in Step 7.
Step 5: Voting on Amendment to
Timeshare Declaration and
Termination Agreement.
Even though the Developer may
have the votes necessary to unilaterally
approve the amendment to the timeshare
Developments • September 2009
Reprinted with permission from ARDA, copyright 2009
declaration and unilaterally approve
the recordation of the Termination
Agreement, the project documents may
require that the owners association give
the owners an opportunity to formally
vote on the termination. This process is
helpful in informing all of the remaining
timeshare owners how the project is going
to be terminated and how the owners
will be compensated for their timeshare
interests. If the project documents and
state law permit, the easiest way to hold
the vote is to send ballots out to all of the
owners and require that they return the
ballots by a specic date.
Step 6: Recording Declaration Amendment and Termination Agreement;
Executing Purchase Agreement.
Step 7: Quiet Title Action.
Most title companies will require
that the Developer complete a quiet title
action before they are willing to issue a
title policy insuring that the Developer
owns marketable title to the terminated
timeshare interests, free of any timeshare
owner claims. Title companies require the
quiet title action because there are most
likely timeshare owners who (1) have died,
(2) are not responsive to the Developer,
or (3) are not able to be located—such
owners will not have deeded their interests
to the Developer. Title companies are
not comfortable with record title owners
showing in the title records, even though
the termination procedures have been
strictly followed by the Developer.
Next, the amendment to the
declaration and the Termination
Agreement can be recorded. Concurrently
with the recording of these documents,
the Developer and the owners association
should execute a purchase agreement,
whereby the Developer agrees to purchase
the remaining timeshare interests from the
owners association. The Developer and the
owners association may want to deposit
the purchase money in escrow pending
the completion of the quiet title action
discussed in the next step.
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29
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Through a successful quiet title
action, the Developer will be able to
obtain a judicial determination that the
termination process was valid and that the
timeshare owners who have not transferred
title to their interests (even those that the
Developer was not able to nd or that
voted against termination) no longer have
any ownership in the project. In most
instances, the Developer can obtain a
default judgment making the quiet title
action very streamlined.
Step 8: Judicial Reformation—An
Alternative Approach.
In the event the Developer is taking
over a project that is in disrepair and
determines that it is not feasible under
the project documents to terminate the
project or achieve the necessary ownership
interests to control the votes in the owners
association, the Developer may need to
have the project facilities updated, so it
can successfully market and sell timeshare
interests in the project.
Renovating projects to meet today’s
competitive market standards is costly,
and many owners balk at paying the
increased assessments necessary to
cover such expenses. As a result, owners
associations and/or Developers are often
times unable to obtain the votes necessary
to renovate projects. The only option the
Developer may have is to le a complaint
and petition in state court for judicial
reformation of the project documents to
reduce the percentage vote required for
owner approval of the proposed capital
repair and replacement budget. Upon the
voting requirements being lowered, the
Developer may then control enough votes
to cause the owners association to levy a
special assessment to cover the costs of
renovating the project. Some state statutes
explicitly provide for judicial reformation
when the voting requirements in project
documents are too restrictive. Some
Developers have even been successful with
judicial reformation in states where judicial
reformation is not provided by statute.
30
Developments • September 2009
Re-thinking Business
In summary, terminating a timeshare
project can be long and complicated but
may be protable for an enterprising
Developer willing to wade through a
difcult process. This may also be a helpful
option for owners who otherwise can not
get the funds needed to refurbish their
project. When structuring a termination
plan, the Developer’s primary goal must
be to obtain insurable title to all of the
timeshare interests, while complying with
state law and the project documents and
attempting to be as fair as reasonably
possible to the existing timeshare owners.
For projects that cannot be terminated, the
Developer may want to look into judicial
reformation as a possible alternative.
City. The author acknowledges the contribution
of Harry E. McCoy II, Esq., RRP, Senior
Counsel at Ballard Spahr Andrews and Ingersoll,
who suggested this topic and provided important
historical case studies. Steven’s e-mail is
[email protected].
Endnote
1
Some timeshare projects are in
condominium projects and are subject to
state condominium and/or common interest
ownership laws. Other timeshare projects
are not in condominium projects and buyers
are sold undivided interests (“UDI”) in the
entire project. In most states, UDI timeshare
projects are not subject to common interest
ownership acts.
Steven J. Newman, Esq., works with Ballard
Spahr Andrews & Ingersoll, LLP, in Salt Lake
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